Private Equity and Venture Capitalism: 2008

A Report on India and China

INDIA

The birth of a young, upwardly mobile self indulgent consumer is propelling

economic activity in India, making it a global investment magnet. With around
366 private equity (PE) firms operating in India and providing approximately
US$14.2 billion in funding in 2007 (expected to rise to US$20 billion by
2010) private equity is taking advantage of, and fueling, growth in sectors
such as information technology (IT), IT enabled services (ITES), healthcare,
retail, media & entertainment, manufacturing and realty. With real estate
and infrastructure taking the government’s priority, 28% of all Indian PE
investments (by value) were made in this sector, followed by power (13%), while banking & finance, and
telecoms tied for the third place (8.7%).

Risk Capital Foundation set the path for PE operations in India in 1975 and was followed by the likes of
Investment Development Bank of India (IDBI), Investment Finance Corporation of India (IFCI) and Industrial
Credit and Investment Corporation of India (ICICI). Current PE players in India include Baring Private
Equity partners, Temasek Holdings (Pte) Ltd, Blackstone Group LP, Actis Capital LLP, Warburg Pincus, CDC
Capital, Draper International, HSBC Private Equity, Chris Capital and Westbridge Capital (now a part of
Sequoia Capital).

In 1996, a few international players began to invest in India, but these investments, both in terms of
number of deals and value, fell in the years between 2000 and 2003 as a result of the meltdown of the
dot.com boom. The re-emergence of venture capital (VC) investment in India gained momentum in 2004,
and grew robustly in 2006-07 on the back of strong GDP growth, favorable investor sentiment and viable
exit options. More recently, PE activity has been on the rise in the wake of a booming Indian economy.
According to Dow Jones Venture Source, venture capitalists invested some US$928 million in 80 deals in
early-stage financing during 2007, a 166% increase (in value) over the US$349 million invested in 36
deals in 2006.

Table 1. Number and Value of deals in India from 1996 to 2006 (in USD)
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Number of Deals 5 18 60 107 280 110 78 56 71 146 299
Value 20 80 250 500 1,160 937 591 470 1,650 2,138 7,460
Source: Evalueserve, IVCA and Venture Intelligence India

The mostly export-oriented IT services sector, accounting for almost 55% of GDP in 2006, has been a
sector of choice for VC investments. The sector which includes Business Process Outsourcing (BPO),
Knowledge Process Outsourcing (KPO), Drug and Clinical Research Outsourcing (CRO), Engineering
Services Outsourcing (ESO) and Software as a Service (SAAS), is expected to grow at a rate of 22% in
2007 contributing approximately 10% to domestic GDP growth. However, given the export-oriented
nature of this sector it is viewed as being under threat of being abandoned by VC firms given the
slowdown in west. However, Asia- and India-focused IT companies in this sector will continue to be vetted
by VCs looking for lucrative returns.

Other sectors also provide enticing opportunities for PE in India. Businesses geared towards servicing the
Indian consumer are expected to witness growth to the tune of 19% over the next five years and offer
superior returns to PE. These include retail, hospitality (airlines, hotels and theme parks), healthcare
(including medical tourism, alternative medicine, spas, hospitals pharmacies and laboratories),
entertainment and private education. Real estate and infrastructure are also in the cross hairs of PE
players – the latter having the capacity to absorb as much as US$500 billion over the next five years.
Indian manufacturing is not being left behind either. Apart from enjoying the traditional cost advantages
of a developing nation, it is adding value by incorporating state-of-the-art processes and value added

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 Private Equity and Venture Capitalism: 2008
A Report on India and China

services in industries such as automobiles and components, electrical and electronic components, chemicals,
pharmaceuticals, gems and jewellery, and textiles. Other sunrise industries like airline certification and
maintenance companies, wine production and e-learning courses for specialized sectors are ripe for VC
funds.

Even though 2008 might be a sideways year for PE in India owing to the current global slowdown, dour
investor sentiment and seizure in the debt markets, the long-term growth trend in India favorable. PE firms
are also adapting to market conditions and resorting to providing mezzanine finance to limit their risk
while still have a stake in any upside.

CHINA

The Chinese PE story began in the second half of the 1980s. With most funds
dominated by the government at that time, the real impetus came in the late
1990s with the rapid development of the Internet. By 1993 huge capital
inflows and foreign investment into the economy brought the country into the
forefront as an emerging giant.

Following the cue of The Beijing Venture Capital Company state-owned

enterprises, private enterprises, public companies, foreign VC firms and non-banking financial institutions
began investing in the technology sector. Over time the government developed a legal framework to
support VC activity that would support small and medium size enterprises (SMEs) in sectors like IT, biotech,
and advanced manufacturing.

Chart 1. Total amount of newly raised funds from Q1 '06 to Q4 '07(in U.S. millions)
$14,000
$12,531.4
$12,000
$9,666.1
$10,000
$7,593.6
$8,000
$5,789.6
$6,000 $5,130.3
$4,435.0
$4,000 $2,863.0
$1,768.0
$2,000

$0
Q1 - 06 Q2 - 06 Q3 - 06 Q4 - 06 Q1 - 07 Q2 - 07 Q3 - 07 Q4 - 07

Source: Zero2IPO – China VentureDatabase

Since 2007 China has seen rapid growth in PE activity with a total of about US$13 billion invested in 177
deals. In terms of industry focus, investment in Chinese IT companies was US$992 million in 2007, down
9% from 2006, according to data from Dow Jones VentureSource. The energy sector too saw a decrease
in number of deals from 14 of US$31 million invested in 2006 to six of US$421 million invested in 2007.
While the focus shifted from Web-related and energy investments, non-technology sectors like retail
gained importance. This is evidenced by the fact that US$1.25 billion was invested in the consumer retail
industry, an 83% increase from US$682 million in 2006. Healthcare, though comparatively smaller, saw
record returns in 2007 with 21 deals and US$175 million invested, more than double the US$86 million
invested in 15 deals in 2006.

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 Private Equity and Venture Capitalism: 2008
A Report on India and China

Chart 2. Industrial Distribution of PE investments (by amount)

Bio/healthcare
, 5%

Broad IT, 15%

Services, 10%

Traditional,
65%

Other Hi-Tech,
5%

Source: Zero2IPO – China VentureDatabase

The PE market in China betrayed a variety of investment strategies. Bridge capital accounting for 12.4%
of total PE investment in 2007, while 22 private investments in public equity (PIPE) investments were made,
nine mezzanine capital deals garnered US$842 million and one turnover capital deal secured US$600
million.

Chart 3. Strategy Distribution of PE funds completing fund-raising during 2007

(by amount raised in U.S. million)
$18,000
$15,671.3
$16,000
$14,000
$12,000
$10,000 $8,695.4
$8,000 $6,854.3
$6,000
$4,000 $2,504.8
$1,477.0
$2,000 $380.8
$0
Buy out Fund Growth Fund Real Estate Fund of Funds Distressed Mezzanine
Dept Fund Fund

Source: Zero2IPO – China VentureDatabase

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 Private Equity and Venture Capitalism: 2008
A Report on India and China

The most popular exit option in China is the IPO. Of the 94 exit events, 79 were IPOs, accounting for 84%
of the total. Secondary offers, trade sales and M&A (financial investor transferring stake to strategic
investor) were the other exit options used in 2007.

Chart 4. Exit Distribution (by option)

Secondary
Offer, 9%

Trade Sale,
5%

M&A, 1%

IPO, 84%

Source: Zero2IPO – China VentureDatabase

Sources: www.ventureintelligence.in, www.economictimes.com, www.evalueserve.com, www.businessworld.in,

www.timesofindia.indiatimes.com, www.altassets.com, www.rediff.com, www.hindubusinessline.com, www.siliconindia.com,
www.moneycontrol.com

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